US announces oil sanctions

Event

The US has played its biggest card in its attempt to dislodge Nicolás Maduro as the head of Venezuela's government, by announcing sanctions on PDVSA, Venezuela's state‑owned oil company.

Analysis

Detail on US sanctions, such as the position of Citgo, PDVSA's US subsidiary, remains unclear. But our takeaway is that, by and large, US firms cannot export inputs to PDVSA. If US refiners were to buy oil from PDVSA, they would not be able to pay PDVSA. Instead, the funds would be deposited into a blocked account. We interpret this as a de facto ban on oil trade with Venezuela.

Without hard currency exports to the US, and with most other oil exports taking the form of in‑kind payments of debt to Russia and China, the Venezuelan regime will be under extreme duress. Although it has not responded clearly as yet, we expect the Maduro regime to announce increased sales to China and/or Russia (although these may not materialise, and will probably not replace the cash income from US exports) and alternative sources of diluents (possibly from Algeria, Russia or Nigeria). But it will take time for Venezuela to secure these new inputs and find paying customers for its lost oil exports to the US. In the meantime, Venezuelans will seriously suffer from the imposition of sanctions, as will the Maduro regime. The US, and the opposition, is betting that this will be the trigger to a collapse of support for Mr Maduro from within the regime, and a stimulus to the acceptance by the military to amnesty offers in exchange for free and fair elections.

Having resorted to oil sanctions, the US has played its strongest card and is essentially out of non‑military options on Venezuela. The use of military force still seems extremely unlikely, as it would threaten the legitimacy of US and opposition action in Venezuela. Russia and China could potentially act to prop up Mr Maduro somehow, but at present we do not expect either country to commit fully to such a course of action. China will be unwilling to bet heavily against the US and risk souring relations during trade negotiations. Similarly, we see Russia as more interested in dealing with its own sanctions and, unlike China, financially unable to bankroll the Venezuelan regime.

Impact on the forecast

We had for some time been projecting regime change in Venezuela; coming days will be crucial in determining whether this will indeed occur.